Thoughts on recent Ninth Circuit and California appellate cases from Professor Shaun Martin at the University of San Diego School of Law.

Tuesday, February 12, 2013

Reichert v. State Farm Ins. (Cal. Ct. App. - Jan. 25, 2013)

Maybe one reason why I like reading Justice Bedsworth's opinions so much is because they sometimes sound like something that I would write. If I wrote well, anyway.

Justice Bedsworth expressly says in this opinion -- and it's a very nice thing to say -- that he will "not attempt to improve" on the trial judge's impressive decision below, and that as a result, "[t]he next seven paragraphs are excerpted almost verbatim from the trial judge's statement of facts." (Adding that "This was no phoned-in minute order." Nice.) You can nonetheless figure out where Justice Bedsworth adds an occasional editorial comment of his own. Regardless, check out the factual underpinnings of the appeal:

"In September 2007, plaintiffs Eric and Liz Reichert purchased a two-story home in Huntington Beach at 18341 Rain Circle, which sits in a designated flood zone. Shortly after closing escrow, plaintiffs hired Ben Cauthen (hereinafter “Architect”) to 3 design a substantial remodel of the home. Plaintiffs also contracted with Krecu Construction (hereinafter “Contractor”) to perform and/or oversee the project as the general. Plans for the remodel were submitted to the City of Huntington Beach for approval:

The first set depicted what amounted to a “substantial” remodel since it (1) improved the overall value of the property more than 50% and (2) modified more than 50% of the existing walls. Because of this, additional planning elements were triggered, including a City “in-fill” requirement that neighbors sign off on the placement of windows and a federal FEMA requirement that the ground floor be constructed above the base flood level (which in this instance was about 9 feet); since this triggered significant additional cost and headache (i.e., raising the house 9 feet and staggering windows based on neighbor preference), they went back to the drawing board.

The second set of plans was not too different from the original. One change was the designation of several existing walls that were to remain in place and become part of the new construction. By doing this, plaintiffs avoided the City‟s “in-fill” requirement. In addition, plaintiffs secured an independent appraisal of their property, which, compared to the revised plans, came in at under 50% improved value − escaping the FEMA flood zone issue. As it turns out, the revised plans had a value improvement of about 49.93%, which was just barely enough to get the project permitted.

The contractor handled the job through Travis Bond (“Bond”), the designated on-site project manager. During the demo phase (June/July 2008), a light bulb went on over Bond‟s head: the second set of plans – the one approved by the City – still called for rooms upstairs and downstairs to have 10-foot ceilings, but in order to get the City to sign off on the second set of plans, plaintiffs covenanted to leave in place several original, existing walls. The problem? Those original, existing walls supported 8-foot ceilings, not 10-foot. Ouch. [SM -- The addition of "Ouch" is awesome I've repeatedly use that same line. Like here (in a case involving State Farm, no less), here and here. Love it.]

Bond contacted the contractor and architect for direction, and was told to go ahead and tear down all the walls, including the specific walls designated to remain as part of the approved plans. Bond did as instructed, and brought the walls down. During the next City inspection (mid-August 2008), it was discovered that plaintiffs had exceeded the scope of the permit issued. By taking out the extra walls, the square footage and value of the project increased. Plaintiffs had only $300 of wiggleroom to stay under the 50% FEMA trigger, and putting in eight brand new walls clearly increased the value more than that. There was no question that removing those additional walls increased the linear footage enough to trigger the City‟s “in-fill” requirement. A “stop-work” order was issued, halting the project on the spot.

The contractor proposed a variance, but later learned that while the City could issue a variance from the FEMA requirement, doing so might cost the City its FEMA rating, leading to a widespread increase in the cost of flood insurance for every resident of the City living in a flood zone. The City expressed (informally) its unwillingness to bend the rule for the Reicherts at the risk of hurting every other Huntington Beach citizen. Plaintiffs never formally applied for the variance, as it was a foregone futility. Instead, they filed a civil action against the contractor and architect (2009-125917) and made a claim for insurance benefits from State Farm. The property (apparently the entire structure in progress) was demolished by order of the city at some undesignated time afterwards."

What a story. An entire home gets torn down.

I'm not sure what transpired with the lawsuit against the contractor and architect, but I know what went down with the claim against State Farm, which is the topic of the appeal. It went nowhere. For the reasons identified at length in both the trial court and the Court of Appeal's opinions.

So the lesson is clearly to be careful when you leave yourself only a little wiggle room. It may end up biting you.